Sixty-six of the S&P 500’s constituent companies have reported earnings for the fourth quarter of last year, and they accounted for 22 percent of the S&P 500’s total earnings.
Savita Subramanian of Bank of America said S&P 500 earnings per share rose 2 percent last week to $38.70, but were down 8 percent year-over-year. 73 percent of the component companies performed well in terms of sales results and earnings per share, similar to the previous quarter.
This means that in the fourth quarter of last year, S&P 500 components earned more than 2% more than Bank of America’s expected earnings per share, but excluding financials, earnings at the beginning of January were only 1% higher than Bank of America’s expected earnings.
Despite the better-than-expected performance of financials due to the release of billions of dollars in reserves and a more optimistic outlook for 2021, Bank of America’s Subramanian believes financials have not contributed as much as growth stocks and technology stocks in driving the S&P 500 higher.
Subramanian stressed, however, that Bank of America sees signs of modest growth in financials and recommends sticking with value investing.
Bank of America noted that while S&P 500 non-financials benefited from aggressive corporate cost controls, with net profit margins reaching an impressive 11.3 percent, up 10 percent year-over-year, analysts expect overall net profit margins for S&P 500 components to be 10.2 percent in the fourth quarter of last year, down 70 percent year-over-year.
Of the 10 industries in the S&P 500, analysts expect only the materials industry to see profit margins rise year-over-year. However, the materials sector’s Corporate Misery Index (Corporate Misery Indicator) also stalled in the fourth quarter, indicating a weak earnings recovery in the materials sector. The index is closely related to the corporate profit cycle and sometimes even leads the profit cycle.
Nevertheless, analysts believe that there is still hope for profit margins to rise. By calculating sentiment indicators for companies that have reported fourth-quarter earnings, Bank of America’s forecasting and analysis team found that corporate sentiment remains upbeat and essentially unchanged from the fourth-quarter 2019 level. This implies that market sentiment is expected to continue to improve as the economy gradually recovers.
Based on the above analysis, Bank of America notes that this is a very strange phenomenon: despite the fact that both the S&P 500 and its valuation are currently at record levels, the profitability of the S&P 500 has not increased so far compared to the same period, and even some underperforming component companies have record profitability of -1.6%. This has caused Bank of America to worry whether investors are really optimistic about the outlook.
And even more striking is the 1-day alpha of -20% so far, compared to an average alpha of 2% since 2007. This means that companies that have beaten expectations on both sales and earnings per share have seen their shares underperform the S&P 500 the next day.
What’s even crazier is that companies that beat earnings expectations did not see their stock prices rise; instead, companies that beat expectations on both revenue and earnings per share saw their stock prices outperform the S&P 500 the day after the results were announced.
Bank of America believes that this is the worst situation for the U.S. stock market since the Internet bubble period in 2000. The last Time a similar situation occurred was in the second quarter of 2000, when the S&P 500 plunged 13 percent in the following quarter and the Internet bubble began to burst.
Recent Comments